Bengaluru: United Spirits Ltd’s long-term plan is to increase the contribution from its premium brands to around 75-80% of its overall business from over 60% currently, a top executive said in a conference call with analysts on Wednesday.
United Spirits has been focusing on the premium segment since British distiller Diageo Plc took control of the company three years ago. Premium brands—among them the McDowell’s No.1, Royal Challenge and Signature whiskies—fetch the company higher margins and tie in with its strategy of chasing value rather than volume growth.
“The future profit pool of this industry will be in prestige and above and a lion’s share of our business will be in (that segment)," said United Spirits chief executive Anand Kripalu.
As part of its focus on premiumization, last January United Spirits decided to go the franchise route for some of its popular or mass-market brands, which include Bagpiper and Director’s Special whiskies, in some states.
The contribution from its premium brands, which was around 50% of overall business two years ago, has gone up to around 65% currently, company executives said on the call. Growth in that segment will continue to outpace that of the popular segment, they added.
“If you see Pernod (Pernod Ricard SA), their main competitor, it is anyway 100% in the prestige and above segment. So it’s absolutely the right strategy. In the non-prestige and above not only are margins low, there is very little pricing power and branding capability and you have a lot of the Indian players there, who may not have the same compliance levels as United Spirits," said Abneesh Roy, senior vice-president at Edelweiss Securities.
United Spirits’s management struck an optimistic note about the health of the business on Wednesday. This despite the fact that it reported an 8.8% decline in standalone third quarter net profit, and only a 1.17% increase in total revenue, in the December quarter on Tuesday.
Underlying consumer demand is still healthy and even though a couple of states could change the way they distribute liquor, and thus likely impact United Spirits’s business temporarily, the larger Indian liquor growth story is still intact, they said. To be sure, gross profit margins increased by about 600 basis points in the nine months to 31 December 2017 and stand at 47.4%. A basis point is one-hundredth of a percentage point.
“We have overcome some of the biggest headwinds that had the potential to not just derail this company but to derail this industry and we are past those. And we have come out much stronger for it," Kripalu said.
In the third quarter, i.e. October-December, business was impacted by some states deciding to change the way they distribute liquor. The most significant was the route-to-market change by Haryana, Kripalu said on Wednesday. Punjab, where the formal announcement of a distribution process change has not yet been made, could have a bigger impact in the next quarter while there could be an impact from a similar change likely in Uttar Pradesh too, he added.
“Shocks will come and go. If you step back (and see) from a macro level the fundamentals of the industry, the per capita consumption, and if you then were to use other countries as lead indicators, India cannot but deliver strong volume and value growth in the fullness of time. It is just the nature of the consumer opportunity," Kripalu said.